In our previous pensions publications we have referred to the DWP's consultation on the approach to be taken in relation to scheme benefits once the new legal definition of 'money purchase benefits' in the Pensions Schemes Act 1993 and other relevant legislation comes into force (previously expected to be April, but this will now be 24 July).
The effect of the change will be to explicitly limit the type of benefit that can be 'money purchase' for the purpose of pensions legislation, and so excluded from the funding and other regulation of defined benefit schemes. When the new definition comes into force it will be immediately followed by the coming into force of regulations which deal with some of the consequences of that new definition being retrospective (see below).
As we have mentioned before, this development is of critical importance for schemes for which the new definition coming into force means some or all of their benefits will no longer be 'money purchase' (i.e. they will become reclassified) for the purposes of pensions legislation. The types of benefits identified by the regulations as ceasing to be money purchase as a result of this change include, in particular, cash balance benefits (i.e. where there is some guarantee relating to the return on or growth of the pension fund but the rate or amount of pension to be provided is not defined) and top up and underpin benefits (where a member has a right to the higher of a money purchase fund or a defined benefit benefit). Schemes that provide either of these types of benefit, or any other schemes which provide benefits that are treated as money purchase, but which are something more than benefits based purely on agreed contributions and investment returns, must start their process of compliance with the defined benefit regime as soon as possible. So, it is very important for schemes to assess urgently whether or not this change and the regulations affect them.
As the new definition will apply retrospectively from 1 January 1997, there was concern that when the new definition came into force, schemes that had historically been treating reclassified benefits as money purchase since the 1 January 1997 date will have been non-compliant with the relevant applicable legislation during that retrospective period. The consultation proposed some transitional relief for such schemes, so that any 'non compliant' activities would be validated but only for the period from 1 January 1997 to 27 July 2011. Following much concern about this in the response to the consultation, thankfully the DWP has confirmed that it has:
'changed its policy on retrospection for non-compliant schemes. Decisions taken by schemes between 1 January 1997 and the coming into force of [the legislation providing the new money purchase definition] will be validated, except in two limited circumstances relating to winding up and employer debt where there is a risk to member benefits.'
This means that for the most part actions taken by schemes up until 24th July on the basis that their benefits, which, as a result of these changes are being reclassified as defined benefit, were money purchase benefits will be validated and so schemes will not need to re-visit previous actions in this regard (subject to what we say below about winding up/employer debt).
In a further welcome development, the transitional protection described above is extended to various types of reclassified benefits which were also likely to have been treated as money purchase which were not covered by the first draft of the regulations. These include protected rights, top up benefits and money purchase underpin benefits, as defined in the revised legislation.
Where there will possibly be some impact retrospectively is in relation to winding up and employer debt. Here, the intention is that schemes which started winding-up before the legislation came into force can continue, for the purposes of the statutory priority order, to treat reclassified benefits as money purchase. In addition, for the purposes of the section 75 employer debt legislation, periods before 24th July will only need to be revisited where the debt has not already been calculated for a multi employer scheme.
However, as mentioned above, what is key is that affected schemes are clear about what they need to comply with going forwards. In some cases the statutory requirements will have very short timescales for implementation; for example, those affected schemes which were previously treated as being entirely money purchase, but will now have non money purchase elements as a result of the change in the definition, will need to appoint an actuary by 6 October 2014. They are likely to become eligible for the PPF for the first time from 1 April 2015, and will need to submit their section 179 valuations by 31 March 2015 – i.e. that might only leave the trustees with 5 months to obtain a s179 PPF valuation before the end of March as they will be required to do. Then, they will need to arrange a funding valuation with an effective date no later than July 2015, with the valuation to be completed within 15 months of that effective date.
Those affected schemes that already carry out valuations, but have previously excluded certain benefits which will no longer be money purchase going forwards, should simply include these reclassified benefits in the next valuation. The PPF is currently consulting on proposals as to when it will require an out of cycle section 179 valuation for such schemes, and proposes that it will do so where the reclassification of money purchase benefits will have a material effect on the scheme's funding position.
Member communications will also have to be reviewed fairly swiftly as the Disclosure Regulations requirements will apply in a different way with immediate effect to reclassified benefits from the Effective Date.
With this in mind, we would advise any scheme which provides money purchase benefits to urgently review, with their advisers, whether or not the new definition and regulations will affect their schemes and if so, to consider what measures are required to ensure compliance at the relevant time.